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BRUSSELS — European finance ministers agreed Sunday to create a permanent mechanism to solve future debt crises in the 16 countries that use the euro in an attempt to calm fears over the stability of the currency bloc.
The plan falls short of demands from Germany, which had insisted that private creditors — rather than taxpayers — should shoulder the costs of any future government bailouts.
The new European Stability Mechanism, which will be launched in mid-2013, could force investors such as banks or hedge funds to take losses if a country runs out of money — but only after other eurozone nations have unanimously agreed that the country is indeed insolvent.
If a country is deemed to merely face a crisis of liquidity — that is, it can't access funds quickly enough to repay its debts — it will get emergency loans similar to those signed off on Sunday for Ireland.
There is no agreement yet on how much money nations will pay into the new mechanism, but EU Monetary Affairs Chief Olli Rehn said it would be closely modeled on the current euro440 billion ($582 billion) financial backstop for the eurozone.
"The recent events have demonstrated that financial distress in one member state can rapidly threaten the stability of the EU as a whole," Jean-Claude Juncker, who heads the Eurogroup, an umbrella organization for the 16 euro countries, said after am emergency meeting of EU finance ministers. "This is particularly true for the euro area where the economies, and the financial sectors in particular, are closely intertwined."
The agreement on the broad features of the future mechanism comes after a massive selloff in recent weeks of bonds from highly indebted eurozone countries — primarily Greece, Ireland, Portugal and Spain — as well as the euro.
Several analysts and European officials said investors were fleeing fiscally weak countries because they feared losing part of their money through the new mechanism.
Others had questioned that the current euro750 billion EU bailout fund, which also includes money from the International Monetary Fund and the EU's executive Commission, will be enough to help debt-burdened nations to emerge healthy from the crisis by the time it expires in 2013.
This market anxiety pushed officials to discuss the future mechanism at their emergency meeting Sunday, rather than wait until a summit of EU leaders in December.
"We wanted to clarify this, once and for all and very clearly," said Rehn.
German Finance Minister Wolfgang Schaeuble said the risk premium highly indebted states like Portugal, Spain or Italy have had to pay compared with the benchmark German bunds "should really go down now."
Jean-Claude Trichet, the head of the European Central Bank who had cautioned against forcing losses on private creditors, stressed that the new mechanism "is fully consistent" with current policies of the International Monetary Fund.
"The proposal of the commission was a very good one," said Trichet.
Any future bailouts would come with strict conditions to cut government spending and raise taxes, similar to what Ireland and Greece had to do to get money.
To allow a state to renegotiate its debts in the "unlikely" case that it should be insolvent, so-called collective action clauses will be added to bond contracts by 2013, said Juncker.
Under these clauses a majority of creditors could agree on a debt restructuring — which could include extending repayment deadlines, a cut in interest rates, or a reduction of the total amount owed. All other investors would have to accept the deal and would not be able to fight it in court.
